How much do you factor past performance in fund decisions?

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How much do you factor past performance in fund decisions?

Postby JustinR » Sun Sep 01, 2013 7:52 am

I'm currently trying to decide between two funds for my 401k bond allocation:



Traditionally I've been all in on PTTRX, but I've begun thinking I should switch over to SSgA due to the lower costs. But PTTRX has been doing well, although I know past performance is not indicative of future performance. It's still tempting.

I think that doing 50/50 is a completely fine strategy, but ideally I'd rather just decide on one than sit on the fence.

I'm sure most of you will say something like "It should have zero factor in your decision, go with the lower ER." But if you were comparing two similar funds, and one had a 20% performance and the other had a -90% performance you'll probably go with the first. So there is a factor there, however small it may vary from one person to the next.


A) If you were me, which fund would you pick?

B) Do you factor past performance when making fund decisions? If so, how do you do it?
Last edited by JustinR on Sun Sep 01, 2013 8:07 am, edited 2 times in total.
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Re: How much do you factor past performance in fund decision

Postby The Wizard » Sun Sep 01, 2013 8:02 am

Sometimes I compare performance between funds that are roughly equivalent, such as the MidCap funds in TIAA-CREF vs those in VG. Or I take a look at Growth vs Value fund performance for a certain cap-weight of the market.
But I can't say that I chase sector or hot fund performance...

In your particular case, that PIMCO fund seems to be outperforming consistently, so try to determine why that is true. Staying with it doesn't seem to be a terrible mistake...
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Re: How much do you factor past performance in fund decision

Postby dickenjb » Sun Sep 01, 2013 8:09 am

It would be a better strategy to look at the underlying assets in the funds. For instance, if one of your two bond funds has a duration of 7 years and the other 4, base your decision on how far out the yield curve you want to be. Or if one invests in mortgage backeds at market weight and the other one is overweight...

Bottom line is that if you believe in EMH, if Pimco has outperformed the bond index at higher er, it has done so by taking on more risk.

Having said all this, Pimco is highly regarded for an active manager of fixed income. I don't think 50/50 is a bad strategy at all. Minimize regrets and all that.
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Re: How much do you factor past performance in fund decision

Postby JoMoney » Sun Sep 01, 2013 8:09 am

JustinR wrote:say something like "It should have zero factor in your decision, go with the lower ER."

Since the lower cost one is a (relatively) high quality index fund.. yeah.. that.
For me, duration and quality are the primary factors. I don't like the idea of active funds implementing strategies I don't understand.

Regarding PTTRX,
http://portfolios.morningstar.com/fund/ ... ture=en-US
Why are they "short" cash to go "long" on extra bonds? I'm sure it has some effect like leverage, it might be safe, but I don't get it.
It holds a wider variety of bonds than what I'm comfortable with (relatively below average credit rating overall, small amounts of junk bonds and international bonds)
There are things in the PTTRX fund that I don't understand, and therefore don't give me the sense of security I want in my "safe" investments / bond fund.
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Re: How much do you factor past performance in fund decision

Postby mhc » Sun Sep 01, 2013 9:43 am

OP,

do you understand what is in the PIMCO fund and how it works? If not, then go with the index fund.

Bonds are suppose to reduce the risk of the portfolio. How does the PIMCO fund serve this role?

I would go with the index fund because I understand it and it serves the proper role of reducing risk.
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Re: How much do you factor past performance in fund decision

Postby midareff » Sun Sep 01, 2013 9:46 am

Why not pull up a M* chart of them for the period of 2003 (as an example) through now, paying close attention to what happened in the 2007 -2008 crunch?
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Re: How much do you factor past performance in fund decision

Postby JustinR » Sun Sep 01, 2013 10:05 am

midareff wrote:Why not pull up a M* chart of them for the period of 2003 (as an example) through now, paying close attention to what happened in the 2007 -2008 crunch?

I can't find any annual charts for the SSgA fund for some reason.

But here's PTTRX:

Image

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
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Re: How much do you factor past performance in fund decision

Postby jimkinny » Sun Sep 01, 2013 10:31 am

I do not care about past performance of one fund vs another. I just do not care about that stuff any more. I figured out that risk is what determined past performance and trust it will do so in the future. Then the cost matter hypothesis come into play. then I use the keeping it simple theory because if I try anything else, I do not stick with it over even the intermediate term.

jim

I am editing this post to add: if I want to add more risk, I do not try to find a riskier bond fund, but I might in the future but for now I would add more of a stock fund to my portfolio. I understand the desire to do so, i do not assume they are wrong, it is just what makes sense to me. In the future I might take on a bit more term risk if rates return to 4-6% on a 10 year Treasury.
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Re: How much do you factor past performance in fund decision

Postby nisiprius » Sun Sep 01, 2013 10:34 am

I am dead serious about this: to me, "stay the course" means a component of intentionally, deliberately, and stubbornly adhering to whatever you have previously decided to so, even if you now think what you previously decided to do was suboptimal. The whole point is not to tweak and shift and fiddle and agonize.

To me, "stay the course" means "when in doubt, just keep doing the same thing."

Given two roughly comparable, broadly suitable, basically OK investments, A and B, you know what every analysis is going to show: the analysis is going to show that over some really inhumanly long period of time, they did about the same; one did slightly better; and during that inhumanly long period of time there were decades or more when one was ahead, then the other was ahead, etc. In order to get the long-term returns of either of them, you need to do your best to hold for the long term. That means holding through periods that look good and periods that look bad. Because tempting as it is, all the evidence is that trying to shift back and forth so that you are always going to hold the good one isn't going to work. For sure, it is going to keep you in a constant state of anxiety and gamblers' mood swings. Opinion is sort of divided on whether you will merely add your personal "manager risk" without adding return, or whether most of us are negatively talented and have the anti-skill set that enables us to consistently buy high and sell low.

As to what I do personally, I try to pay a lot of attention to risk characteristics--2008-2009 has given me a convenient yardstick for that--to broad patterns of risk and return. I honestly believe that past similarity actually does predicts future similarity. That is, if funds X and Y stay close to each other on the growth chart in detail, the only way that can happen is that they are holding broadly similar portfolios, which predicts they will continue to stay close to each other. I pay attention to matching my portfolio to my personal taste, needs, etc.--to getting a good fit. And then I just try to let go and forget about it.

Yeah, I shifted from active to indexed when I rolled over my 401(k) and had a free choice of funds. But I don't think that counts as a course change because the reason I was in the active funds was that there were no index funds to use.

My mental model is that there are active managers that can squeeze out a little alpha, but not a lot--0.5%, 1% maybe--and that they keep all of it for themselves. When an active fund outperforms after expenses, it's because there's some extra risk, often hidden in subtle ways.

A sane person might say "I prefer Intermediate-Term Bond Index to Total Bond; I see the higher risk but given that I also hold stocks it hardly matters, and for my tastes I'll take that risk to get the return."

Similarly, a sane person might also say "I prefer PTTRX to Intermediate-Term Bond Index. I see the higher return. I don't actually see the higher risk, I see lower risk. Based on what I know, I have to believe the higher risk is there, but, once again, I'm happy with it. I'm willing to live with the lower credit quality, the use of leverage, and the uncertainty of the fund manager's judgement. A bit more risk for a bit more return suits me.

Image

Look at 2008-2009. All of the bond funds did the job you wanted them to do: coasted almost straight across while Total Stock was plunging. And at another times. That's the big thing. "Which was 'best'" is secondary.

So, my own decision-making process would be: any of these three funds looks like a nice plain "core" bond fund and acts like a nice plain "core" bond fund, and they all are completely different from any stock fund (Total Stock, yellow) at all. I don't think anyone in the world is going to say that any of these funds is an inappropriate choice to be the core bond fund in a three-fund portfolio. They will all work. So I'd just sorta pick the one I like best, based on ticker symbol or eeny-meeny-miney-mo or personal risk tolerance or Larry Swedroe's dislike of GNMAs or liking Bill Gross's column--and then stick with it.

And when people ask why you chose that one, I'd look them straight in the eye and say "I got down to where I couldn't see much difference and picked the one I liked at the time."

Having chosen PTTRX, it seems to me that one should stick with it, because the proposition that you know so much better than BIll Gross that you can anticipate his mistakes and jump off before he makes them just seems really unlikely.
Last edited by nisiprius on Mon Sep 02, 2013 7:58 am, edited 1 time in total.
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Re: How much do you factor past performance in fund decision

Postby nedsaid » Sun Sep 01, 2013 10:53 am

When choosing between mutual funds, past performance is only one factor.

I look at the management company itself. Do the fund managers have long tenure? Does the fund company have a deep bench of fund managers and analysts? Does the company have a consistent approach to investing or do they constantly change their strategies? Do the managers own a substantial stake in their own fund? (It is like the dog on the live dog food commercial on the Today show. If the dog on the commercial won't eat the advertised dog food, I wouldn't buy it for my dog either). Is the top management of the fund company stable or do the top managers turn over?

So what you are picking is the quality of the firm itself. When in doubt, pick the fund who has the superior investment company behind it. The superstar fund managers (if they even exist anymore) come and go. I would not pick a fund just because of the manager.

Bill Gross has been fantastic as a fixed income fund manager. I think he is the real deal. The problem is that he is 69 years old. How much longer is he going to be there?
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Re: How much do you factor past performance in fund decision

Postby nisiprius » Mon Sep 02, 2013 8:17 am

With regard to the management, FOR WHAT IT MIGHT BE WORTH, which might not be very much, Morningstar currently has two! not one but two! rating systems: the star system is a measure of past performance, has been shown NOT to have any persistence or predictive value (but nevertheless is useful because it's a relative comparison to other funds of the same kind, and is risk-adjusted).

The "medallion" or "analyst rating" system, the new one, reflects a committee decision made by analysts, whose opinions on different aspects of the fund ("process, performance, people, parent, price) are scored according to a formal methodology to come up with a rating of "Gold, Silver, Bronze, Neutral, Negative." It is Morningstar's hope, claim, expectation, whatever that these ratings will turn out to be predictive of future performance:
Morningstar wrote: If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years. The Analyst Rating is not a market call...
(I bet they won't be, but of course it will take a "full market cycle of at least five years" before we will know for sure that they aren't. :) )

The rating system does take into account things Bogleheads care about like stewardship and governance.

Anyway, they like PIMCO Total Return, apparently not just for performance:

Image

They present the rating system briefly here and in detail here.
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Re: How much do you factor past performance in fund decision

Postby nedsaid » Mon Sep 02, 2013 11:46 am

What I am saying is don't get dependent on superstar fund managers. I don't hear much about them anymore. The days of Peter Lynch, Helen Young Hayes, John Neff, Bill Miller, Chris Davis, and others being media darlings seems to be over. There are few that stay in place for a long time. Bill Gross is one of the very few left that is in the media eye all the time.

The Hedge Fund guys seem to get a lot more attention now a days. Their records are harder to scrutinize.

Of course, indexing makes it all easy. No worries about underperformce or manager changes.

I was also making a point about the quality of the organization. Fidelity, Vanguard, T Rowe Price, American Funds, and Franklin Templeton come to mind. If one was going with managed funds, you odds are better with these firms. They all have a deep bench of managers and analysts. You are not dependent on a star manager. It is noteable that the first three all have index funds as well.

My biggest holding is a Total US Stock Market Index. I have been very pleased with it.
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Re: How much do you factor past performance in fund decision

Postby pkcrafter » Mon Sep 02, 2013 1:59 pm

Justin, you have asked about two funds and included the "benchmark." I assume you got the performance data and benchmark from M*. I just want to point out that M* uses Barclays Agg Bnd Index for most bond funds, but if you look at the category average you'll see that it isn't even close to the benchmark.

What I'm saying is the "benchmark" is not appropriate for most bond funds listed by M*. In this case the SSgA fund does closely track the index--same as Vanguard's total bond. The PIMCO fund is very different and should not be compared to the SSgA fund or the benchmark. I don't know what the risks are in the PIMCO fund, but an interest rate of 3.84% and a duration of 4.7 compared to interest of 2.17% and duration of 5.4 tells you there is more risk in the PIMCO fund. Also, the SSgA fund is AA rated and the PIMCO fund isn't rated at all. The risk is there, it just hasn't shown up--yet.

I think it this situation you have two very different bond funds, so holding some of each is a reasonable idea. I would not hold the PIMCO fund as my only bond holding.

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Re: How much do you factor past performance in fund decision

Postby chaz » Mon Sep 02, 2013 2:32 pm

When my portfolio was set up with 3 index funds, I have stayed the course.

Much good info in the forum wiki.

Keep it simple.
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Re: How much do you factor past performance in fund decision

Postby nisiprius » Tue Sep 03, 2013 6:38 am

nedsaid wrote:What I am saying is don't get dependent on superstar fund managers. I don't hear much about them anymore. The days of Peter Lynch, Helen Young Hayes, John Neff, Bill Miller, Chris Davis, and others being media darlings seems to be over. There are few that stay in place for a long time. Bill Gross is one of the very few left that is in the media eye all the time.
That's an interesting observation. I've never paid much attention to star managers, and in fact I've heard of Lynch, Neff, and Miller, but not Hayes or Davis.

Is, what's-his-name, FAIRX, Fairholme Fund, Bruce Berkowitz currently considered to be a genius who disproves the EMH or an unperson?
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Re: How much do you factor past performance in fund decision

Postby IlliniDave » Tue Sep 03, 2013 2:28 pm

On the subject question, I learned the hard way. In general my criteria for what to buy are 1) is the asset class part of my plan. 2) is there a low cost, passively-managed option available (index funds generally preferred, but not exclusively). I use value averaging/ongoing rebalance with my new contributions, so there's some amount of weight given to recent performance in how I direct new money, but it's in the opposite direction of returns chasing. Generally, more goes into the funds that have lagged.

A caveat: I do have some PIMCO Total Return that I bought when it was the only non-"managed income" bond fund available in my 401(k), and I haven't sold it even though there is now a pair of index funds available. At last check Gross is still outperforming the available indexes, and I'm too weak to dump the PIMCO solely on principle.
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Re: How much do you factor past performance in fund decision

Postby JustinR » Tue Sep 03, 2013 10:53 pm

IlliniDave wrote:On the subject question, I learned the hard way. In general my criteria for what to buy are 1) is the asset class part of my plan. 2) is there a low cost, passively-managed option available (index funds generally preferred, but not exclusively). I use value averaging/ongoing rebalance with my new contributions, so there's some amount of weight given to recent performance in how I direct new money, but it's in the opposite direction of returns chasing. Generally, more goes into the funds that have lagged.

A caveat: I do have some PIMCO Total Return that I bought when it was the only non-"managed income" bond fund available in my 401(k), and I haven't sold it even though there is now a pair of index funds available. At last check Gross is still outperforming the available indexes, and I'm too weak to dump the PIMCO solely on principle.

Nice to see that you're in the exact same boat as me.
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Re: How much do you factor past performance in fund decision

Postby Kevin M » Tue Sep 03, 2013 11:43 pm

The only time I look at past performance is when there are no index-fund choices in an employer-sponsored plan. Then I look for a fund that has most closely tracked the index fund I'd like to own (as one criterion).

An example is the American Funds EuroPacific Growth fund, which is common in 401k/403b plans, and last I checked had tracked Vanguard Total International stock index fund very closely over previous five years, so it's what I'd consider a closet index fund. (Just checked again, and still looking good).

In your case the SSgA fund clearly is closer to something like Vanguard total bond index, so if that's the kind of fund you'd like to own if you had a choice, it seems like the better choice.

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Re: How much do you factor past performance in fund decision

Postby cflannagan » Tue Sep 03, 2013 11:49 pm

I honestly can't remember the last time I actually picked something based on past performance.

Before I discovered Bogleheads and index fund investing, I was actually a student of "mechanical investing" philosophy - using complicated formulas to come up with several stocks to invest in (like Magic Formula investing for example, which ultimately got me nowhere).
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Re: How much do you factor past performance in fund decision

Postby feh » Wed Sep 04, 2013 1:39 pm

JustinR wrote:
IlliniDave wrote:On the subject question, I learned the hard way. In general my criteria for what to buy are 1) is the asset class part of my plan. 2) is there a low cost, passively-managed option available (index funds generally preferred, but not exclusively). I use value averaging/ongoing rebalance with my new contributions, so there's some amount of weight given to recent performance in how I direct new money, but it's in the opposite direction of returns chasing. Generally, more goes into the funds that have lagged.

A caveat: I do have some PIMCO Total Return that I bought when it was the only non-"managed income" bond fund available in my 401(k), and I haven't sold it even though there is now a pair of index funds available. At last check Gross is still outperforming the available indexes, and I'm too weak to dump the PIMCO solely on principle.

Nice to see that you're in the exact same boat as me.


PTTRX is the only actively managed fund I own. It is half of my intermediate bond holdings. I was not able to ignore how Gross has consistently outperformed the index.

Ask me in 5 years if it was a wise choice.
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Re: How much do you factor past performance in fund decision

Postby nedsaid » Thu Sep 05, 2013 12:14 am

Chris Davis runs a couple of funds, he has a brother that managed a REIT fund. Their dad, Shelby, was a well known fund manager as well. They are value oriented managers. Part of their success was from investing in the financial sector. Chris manages as I recall a load and a no-load fund. I have never invested in their funds, I have seen him interviewed on financial shows. He is a very good guest, very articulate and breaks things down and is easily understandable. In that respect, he reminded me of Peter Lynch.

Helen Young Hayes was manager of the Janus Overseas fund during Janus' heyday. I saw her highlighted in a few articles. She was pretty well known.

I also have heard of Berkowitz.

I don't see the volume of articles on the "star" managers that I did in the 1990's. I think part of it was the two bear markets during the 2000's. People are not so enamoured by the stock market as they were in the late 1980's and the 1990's.
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Re: How much do you factor past performance in fund decision

Postby YDNAL » Thu Sep 05, 2013 8:51 am

JustinR wrote:I'm currently trying to decide between two funds for my 401k bond allocation:


What is your Fixed Income % of total portfolio ??
  • What truly matters, for someone who is young(er) and accumulating over the long-term, is that Fixed Income mitigates Equity risk and help rebalance [other than with new contributions] during stressful times in the Equity market.
  • Otherwise, you dance on the head of a pin.
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Re: How much do you factor past performance in fund decision

Postby tadamsmar » Thu Sep 05, 2013 10:47 am

nisiprius wrote:The "medallion" or "analyst rating" system, the new one, reflects a committee decision made by analysts, whose opinions on different aspects of the fund ("process, performance, people, parent, price) are scored according to a formal methodology to come up with a rating of "Gold, Silver, Bronze, Neutral, Negative." It is Morningstar's hope, claim, expectation, whatever that these ratings will turn out to be predictive of future performance:
Morningstar wrote: If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years. The Analyst Rating is not a market call...
(I bet they won't be, but of course it will take a "full market cycle of at least five years" before we will know for sure that they aren't. :) )


After the star system got hammered for being non-predictive, Morningstar came up with the new Analysts Ratings for Funds system about a year ago. In theory, this gave Morningstar's new ratings a 5 year breather from evidence showing it was not predictive. But, based on the 1st year's performance, so far so bad:

http://www.wallstreetrant.com/2013/02/p ... alyst.html

Based on average rank: Neutral > Silver > Gold > Bronze > Negative
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Re: How much do you factor past performance in fund decision

Postby dad2000 » Thu Sep 05, 2013 10:58 am

I consider poor past performance to be a negative indicator (much like high ER), but that's about it. Good past performance is irrelevant to me. I think that this is consistent with some studies that there is some persistence of poor performance.
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Re: How much do you factor past performance in fund decision

Postby JustinR » Thu Sep 05, 2013 11:34 pm

YDNAL wrote:
JustinR wrote:I'm currently trying to decide between two funds for my 401k bond allocation:


What is your Fixed Income % of total portfolio ??
  • What truly matters, for someone who is young(er) and accumulating over the long-term, is that Fixed Income mitigates Equity risk and help rebalance [other than with new contributions] during stressful times in the Equity market.
  • Otherwise, you dance on the head of a pin.

20%-ish

Yep, I use PTTRX to mitigate equity risk and is a major rebalancing tool for me.

I think I might stick with PTTRX for the forseeable future, not because I think it'll do better, but because I think at the very least it won't do worse than the other fund.
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Re: How much do you factor past performance in fund decision

Postby Rodc » Fri Sep 06, 2013 11:41 am

First I don't look at historical performance to choose a fund because I use index funds, but IF you want to look at historical performance, make sure you look at return AND risk. One in isolation is meaningless.

Simply given the nature of the Pimco product, I would judge it to be more risky (manager risk, active selection risk, higher cost to over come).

Personally I would choose the index fund.

If you want to use the riskier fund, to control portfolio risk to a given target, you would want a slightly higher bond and slightly lower stock allocation (though frankly neither fund is all that different so in practice this a bit of splitting hairs.)
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